Citi On Draghi: Expect Nothing From The ECB Before The ESM Is Active (In September At The Earliest)

Earlier we heard Goldman's talk down of Draghi's comments, which we will not tire of saying, were absolutely nothing new. Now here is Citi's Jurgen Michel throwing cold water in the face of all those who believe that the ECB (which can't really do more LTROs unless it is willing to accept Zynga's virtual farms as collateral) will save the day with more direct intervention. To wit: "in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy." In other words, nobody believes Draghi, despite his stern warning to "believe" him - everyone wants action out of the ECB head, not talk.

From Citi

After saying that the ECB has “no taboos” in respect of taking measures to maintain price stability, Mr. Draghi is now also outspoken in respect of taking unconventional measures to preserve the euro. Mr. Draghi’s comments suggest that the ECB is less opposed to supporting sovereign bond markets again either indirectly through multi-year LTROs or directly through the use of the SMP. However, in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy. Mr. Draghi did not touch on recent comments by Austrian Governor Ewald Nowotny regarding the ability of the ECB to provide funding to the ESM. In that respect, the crucial question is if the direct funding of the ESM is seen as a form of the prohibited monetary financing or not. So far, the position of the ECB has been that ESM funding would be not within its mandate, but an article in Dutch newspaper Financieele Dagblad quotes sources today as saying that allowing the ESM to tap the ECB’s open market operations would comply with the ECB’s charter, because, as the European Investment Bank (EIB) which has access to ECB funding, the ESM would have the status of an international financial institution.

For anyone confused, if Citi, which has had its pulse on Europe better than most (even DB which is explicitly setting European policy but had completely forgotten about that whole "subordination" issue), says nothing will happen until the ESM is active, which can happen at the earliest in September with the German constitutional court's decision, then the next two months will be very long and drawn out for those hoping for more short covering squeezes.

In other words, once again we are back to requiring Germany's blessing for any future bailout action. Which also explains why Draghi waited until today - when Merkel started her vacation - to pretend he is once again in control.

It seems to me the ECB could open a credit line for the Spanish and Italian national central banks with which the national central banks could buy the bonds of their gov't. Then the national central banks repo those bonds to the ECB in a variant of the LTRO for a period of years - call it five. The ECB then would not be buying government debt but would succeed in funding the gov'ts for a period of time. Isn't that possible?

(The trust is gone, the capital leaves Europe: the ECB [now] stands for a Europe, in which the South has the say. The consequence will be a gigantic redistribution [of wealth] at the burden/cost of the North.)

The comment shows a great deal of frustration but it seems that the Germans don't know yet what they can/want to/should do.

I'm amazed Draghi's comments have such an inpact- NOTHIHG WILL HAPPEN til at least September, if then.By that time, all the rules will have changed again. Glad I'm out of this "market"- when 2 +2 =97, i give up.

the ESM will never go live. only money going in would be germany, finland, france and netherlands. everyone else has no money to contribute, and would actually be draining the fund the second those countries contributed. Ex: spain to contribute 90B EUR and Italy to contribute 125B EUR. its good for a laugh, and that about it.

heres my take. Which should hold more water. If you could do it you would have done it years ago. You cant. No tech analysis needed. Someone tell the algos that. Are we gonna get another blog about technical analysis again today. Those people should feel like idiots today. like it ever changed

Look beyond Germany. In the Netherlands general elections are up (Sept 12) and they hate printing money and (sterilized) SMP as much as the Germans hate it. And Finland has always been the closest to leave the party. So while those countries might not react to Draghi talking about doing something (why should they? he's only ruining his own credibility if he fails to deliver), they will act once he actually tries to do something.

Sorry, I posed this before but under another's message. Just learning how to work ZH's message board. My idea is this:

Isn't it possible that the ECB opens a credit line for the Spanish and Italian national central banks with which the national central banks buy their gov't's bonds. Then the national central bank either holds the debt or repos it to the ECB in a variant of the LTRO for a period of years - call it five. The ECB then would not be buying government debt but would succeed in funding the gov'ts for a period of time.

Seems plausible. What went by unnoticed is that mamy German economists seem to be convinced that the currency needs to built from scratch again i.e. variations in interests are tolerable but their will be a kind of outer limit for the currency which needs to be defended. So I guess many people have started to realise that a common currency with common interest rates is pure nonsense. What makes sense is to turn the Euro into a currency basket and then try to converge interest rates slowly. It is an admission to the fact that Keynes and Friedman were wrong and the Austrians were right. A de-centralisation of monetery politics works better.